Did an out-of-state manufacturer become subject to Connecticut corporation business tax by leasing promotional video machines to Connecticut retailers?

Plain-English summary

An out-of-state manufacturer sold goods into Connecticut through protected solicitation. It proposed placing interactive video machines in unrelated retailers' stores to advertise products, print order forms, and solicit orders for merchandise filled from outside Connecticut. The company would retain ownership and charge each retailer $100 per month.

DRS separated the machines' functions from the leasing arrangement. Advertising, promoting retailer sales, and soliciting orders filled from outside Connecticut were related to solicitation and within Public Law 86-272's protection. Merely owning the machines for those functions, and having unrelated contractors install, maintain, and repair them, would not make the company carry on business in Connecticut.

The monthly lease changed the result. Leasing the machines for a fee was a distinct business activity, unrelated and unnecessary to solicitation. By acting as lessor for consideration, the company was carrying on business in Connecticut under Conn. Gen. Stat. § 12-214 and Conn. Agencies Regs. § 12-214-1.

What this means for you

Protected sales solicitation does not shelter a separate in-state revenue activity. If promotional equipment is placed free as part of solicitation, the analysis may differ from charging the customer rent for it.

Common questions

Did the machines' advertising and ordering functions create nexus? No. DRS treated those functions as solicitation-related.

Did repair contractors create nexus? No, where their role was limited to installation, maintenance, and repair.

What created the corporation-business-tax obligation? Leasing the machines to retailers for $100 per month.

Citations and references

• Conn. Gen. Stat. § 12-214.
• Conn. Agencies Regs. § 12-214-1(a)(9).
• 15 U.S.C. § 381(a)(1) and (2) -- Public Law 86-272.
• Indiana Department of Revenue v. Kimberly-Clark Corp., 416 N.E.2d 1264 (Ind. 1981), cited by the ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-83

Original ruling text

Ruling 90-83, Corporation Business Tax

Ruling 90-83

Corporation Business Tax

Where video machines that are used to advertise and promote sales of a Company's products by unrelated Connecticut retailers are leased for a fee by the Company to those retailers, is the Company "carrying on business in the state," as the term is used in Conn. Gen. Stat. §12-214 and defined in Conn. Agencies. Regs. §12-214-1.

FACTS:

The Company is incorporated under the laws of a state other than Connecticut and has not been issued a certificate of authority to transact business in Connecticut by the Secretary of the State.

While the Company is principally engaged in the business of manufacturing tangible personal property for sale, neither its manufacturing plants, its distribution centers nor its offices or places of business are located within Connecticut.

Through its sales representatives, the Company has solicited orders for its manufactured goods, which orders have been approved, filled and shipped from outside Connecticut, but has not engaged in any activity considered to be "carrying on ...business in the state," as that term is defined in Conn. Agencies Regs. §12-214-1.

The Company has not previously owned or leased (as lessee) real or tangible personal property within Connecticut.

The Company proposes to lease (as lessor) video machines to Connecticut retailers. Each machine will be leased for $100 per month. The video machines will allow a retailer's customer to see and hear (by pressing areas on the screen) a commercial pertaining to various Company products of interest to the customer. Some video machines will provide a sales order form to the retailer's customer. The form will then be used by the retailer to complete the sales transaction between itself and the customer. The machines will also allow orders of merchandise not stocked by the retailer to be placed, then accepted and filled from outside Connecticut by the Company's distribution centers and delivered into Connecticut by common carrier to the retailer, for sale by the retailer to the customer.

The Company will acquire the video machines from an unrelated contractor who will be contractually obligated to install, maintain and repair them. The contractor will subcontract the installation, maintenance and repair obligations to another contractor who is also unrelated to the Company.

DISCUSSION:

Every company "carrying on, or having the right to carry on, business in this state," pursuant to Conn. Gen. Stat. §12-214, is subject to the corporation business tax. However, federal law prohibits a state from imposing a net income tax on the income derived from business activities by a person within the state that are limited to

"(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and

(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1)."

15 U.S.C. §381(a)(1) and (2) [Public Law 86-272].

Within the parameters of 15 U.S.C. §381, Conn. Agencies Regs. §12-214-1(a) provides that "[a] company is 'carrying on business in this state' if, within this state, it engages in one or more of the following activities, including but not limited to: ... (3) selling tangible personal property (as opposed to soliciting orders therefore) ... (9) owning or leasing (as lessee) personal property which is not related to solicitation of orders ..." [emphasis added].

Because the Company has indicated that it intends to retain ownership of the video machines while they are located in Connecticut, the Company will obviously own tangible personal property in this state. Therefore, because Conn. Agencies Regs. §12-214-1(a)(9) provides that owning tangible personal property in Connecticut not related to solicitation of orders constitutes carrying on business, one of the two principal issues in this Ruling is whether the Company's video machines have any purpose not related to the solicitation of orders.

The stated functions of the video machines may be described as follows: (1) soliciting and placing out-of-state orders for merchandise not stocked by the retailer; (2) providing sales order forms for customers to facilitate sales by the retailer to its customers; and (3) advertising and promoting the Company's products with individual customers of the retailer.

Where the video machines perform function (1), soliciting and placing orders for odd-sized merchandise not stocked by the retailer, presumably based on information received from the retailer's customer through interaction with the machine, and the orders are accepted and filled from outside Connecticut and shipped to Connecticut by common carrier, this activity constitutes "the solicitation of orders," clearly within the protective ambit of 15 U.S.C. §381, as recognized in Conn. Agencies Regs. §12-214-1. If the video machines solicit orders directly from the retailer's customers, then the activity is exempted under 15 U.S.C. §381(a)(1). If, on the other hand, the solicitation is done on behalf of or for the benefit of the retailer, then the activity is exempted under 15 U.S.C. §381(a)(2).

Function (2), providing sales order forms for the retailer's customers, which the retailer will use to complete the sales transaction between itself and the customer, does not, strictly speaking, constitute the solicitation of orders by the Company from its direct customer, the retailer. Nor does function (3), the providing of information and advertising material to the retailer's customers, constitute solicitation of orders by the Company from its direct customers. However, both these functions are so obviously calculated to result in the eventual sale of the Company's products that they may be considered within the realm of solicitation. See, Indiana Department of Revenue v. Kimberly-Clark Corporation , 416 N.E.2d 1264 (Ind. 1981). Because these activities are "related to the solicitation of orders," as that term is used in Conn. Agencies Regs. §12-214-1(a)(9), they are therefore outside the scope of that subsection.

As long as all the functions of the Company's video machines involve either solicitation of orders for tangible personal property or activities that are designed to promote sales by the retailer, and not the actual direct selling of merchandise by the Company to the customer within Connecticut, such activities do not constitute "carrying on business" under Conn. Gen. Stat. §12-214, and such activities would thus not make the Company subject to the corporation business tax.

Nor will the presence in Connecticut of agents (or subcontractors of agents) of the Company, whose job is to maintain or repair the video machines involved in this Ruling, and who do not engage in any of the other employee activities enumerated in Conn. Agencies Regs. §12-214-1, subject the Company to the corporation business tax.

Leasing video machines for $100 per month apiece to Connecticut retailers, however, raises another issue. As noted above, Conn. Agencies Regs. §12-214-1(a)(9) makes "owning or leasing (as lessee) personal property which is not related to solicitation of orders" an indicium of "carrying on business in this state." The Company does own the video machines and that ownership is related to solicitation of orders. If the Company merely located those machines within Connecticut and did not lease (as lessor) those machines to Connecticut retailers, its ownership of those machines would not subject it to the corporation business tax. But the Company does not merely own the machines. It is engaged in leasing (as lessor) those machines for a fee and that leasing activity is both unrelated to, and gratuitous with respect to, the solicitation of orders.

RULING:

Where video machines that are used to advertise and promote sales of a Company's products by unrelated Connecticut retailers are leased for a fee by the Company to those retailers, the Company is, by virtue of its leasing activities, "carrying on business in the state," as the term is used in Conn. Gen. Stat. §12-214 and defined in Conn. Agencies. Regs. §12-214-1.

LEGAL DIVISION

December 31, 1990